Government Spending in Canada

Articles on:

     •     The Fraser Institute Budget Performance Index

     •     Success With Fiscal Restraint in Other Countries

     •     Downsizing the State

     •     Ottawa to Blame for Slow Job Growth

     •     Federal Government Transfers

Contents       .......        September 1996    

Editor's Notes
This Issue's Authors
Cover stories : Budget Performance Index Ranks Federal Government Near Bottom
Fiscal Restraint Can Be Successful: Canada Compared With Other Countries
Downsizing the State
Blame Ottawa, not the Private Sector for Less Job Growth
September Questions and Answers
Hong Kong, Canada, and the Future
A Debate About Separation and Supermajority
Pulling Out the Election Gag
Misguided Directions for Ontario
Saving the West Coast Salmon Fishery
Private Prisons Offer Superior Service
Class Warfare and Bad Software
Tinkering With Democracy
Reengineering the Purchasing/Payment Cycle in the Government Sector: How the Federal Government Can Save Millions in Processing Government Purchases and Accounts Payable
The Divider Effect

Editor's Notes

Canada has recently enjoyed some good economic news. Consumer spending is up. It's at its highest level since 1990, although much of the spending is in discount stores by people obviously looking to really stretch their purchasing dollar.

Individual Canadians are doing their bit to get the nation out of its slump. They are buying consumables and in so doing are showing their faith in the country's future. But are government policies helping them?

This issue of Fraser Forum takes a long look at government spending practices. At the core of these articles is The Fraser Institute's Budget Performance Index, which is composed of three sub-indices: spending, revenue, and deficit and net direct debt. As you will see in the article by Joel Emes, the federal government does not fare well. Some provinces have made significant advances in their fights against over-spending, but the federal government is not among them. And, as Fazil Mihlar points out in his article, this must change before Canadians' recent show of confidence can translate into significant economic improvement and job growth.


This Issue's Authors

Stephen T. Easton is Professor of Economics at Simon Fraser University. He has edited, co-written, and written several Fraser Institute books.

Joel Emes has his Masters in Economics from Simon Fraser University. He is a research economist at The Fraser Institute.

Tom Flanagan is professor of Political Science at the University of Calgary.

Gordon Gibson is The Fraser Institute's Senior Fellow in Canadian Studies. He has served both as an MLA and as leader of the B.C. Liberal Party (1975-79). He is a columnist and Institute author.

Herb Grubel, M.P., is the Member of Parliament for Capilano-Howe Sound and is the Reform Party Finance Critic. He has his Ph.D. in Economics from Yale University.

Andrew Kosnaski is a Reform Party Research Economist.

Laura Jones is Environment Economist at The Fraser Institute. She received her M.A. in Economics from Simon Fraser University.

Fazil Mihlar is Policy Analyst at The Fraser Institute. He received his M.A. in Public Administration from Carleton University.

Lydia Miljan is Director of the National Media Archive, a division of The Fraser Institute. She earned an M.A. in Communications from the University of Calgary. She researches and writes On Balance.

Kate Morrison is Co-ordinator of the National Media Archive. She has a B.A. (Hons) in Economics and Communications from Simon Fraser University.

Filip Palda is Professor at l'École Nationale d'Administration Publique in Montreal, and Senior Fellow of The Fraser Institute. He received his Ph.D. in Economics from the University of Chicago.

Cynthia Ramsay is Health Economist at The Fraser Institute. She has her M.A. in Economics from Simon Fraser University.

John Robson is a freelance writer based in Ottawa. He has his Ph.D. in History from the University of Texas at Austin.

Christopher Sarlo teaches economics at Nipissing University in North Bay, Ontario. He is the author of Poverty in Canada.

Karen Selick practices law in Belleville, Ontario, and is a columnist for Canadian Lawyer. You can reach her at kselick@connect.reach.net.

Michael Walker is Executive Director of The Fraser Institute. He received his Ph.D. in Economics from the University of Western Ontario.

Mark Weller is the Manager of Information Systems at The Fraser Institute. He has a B.A. in International Relations from the University of British Columbia.


Budget Performance Index Ranks Federal Government Near Bottom

Joel Emes

Two years ago, The Fraser Institute developed the Canadian Budget Performance Index to measure the behaviour of the federal and provincial governments with respect to budgetary spending, revenue, deficits, and net direct debt. This year, the top three performers for the second annual ranking are Saskatchewan, Manitoba, and Alberta. As table 1 shows, the federal government was ranked ninth overall.

Click here to view Table 1: Budget Performance Index, 1996 (Forecast)

Only Prince Edward Island, New Brunswick, and British Columbia still have not controlled their spending relative to the other provinces.

The Institute created this index as a supplement to its Tax Freedom Day in order to give a broader perspective on the fiscal affairs of the provinces and the federal government. Tax policy is important, but other aspects of government finances should also be considered. Some provinces with very late Tax Freedom Days, such as Manitoba, have controlled their spending and their deficits in recent years in a way that other provinces have not. And on an overall basis, the top performers are showing greater improvement than some other provinces, like Prince Edward Island, which had the earliest Tax Freedom Day but is tenth in overall fiscal performance.

The federal government occupies the bottom spot on this year's revenue and debt and deficit indices. Only its reasonable performance on the spending index saves it from the bottom spot overall. These low federal scores confirm the need for the Chrétien government to not only control the deficit but also reduce the debt.

Based on its 1996/97 budget, Saskatchewan placed first in overall budget performance. This should be good news, but it should be noted that Saskatchewan placed second in last year's ranking, based on its 1995/96 budget forecast, yet came in last on the revised ranking, which uses the budget actuals (see table 2). Saskatchewan's reduced rank for 1995 is due to the Romanow government's overly optimistic spending reduction forecasts, which did not materialize, and better than expected performance in many other provinces.

Click here to view Table 2: Budget Performance Index, 1995 (Revised)

Alberta's revised numbers, for example, moved it from third to first place in 1995. Alberta's budget actuals reveal that it was first in the spending and revenue indices and third in the debt and deficit index. This performance, which was stronger than that forecast, resulted in an overall score of 73.7 percent, which puts Alberta well ahead of second place British Columbia at 51.4 percent.

This year, Manitoba finished second with a strong performance in all three indices.

Alberta's revised numbers . . . moved it from third to first place in 1995. Alberta's budget actuals reveal that it was first in the spending and revenue indices and third in the debt and deficit index.

Only Prince Edward Island, New Brunswick, and British Columbia still have not controlled their spending relative to the other provinces. All three performed well on the debt and deficit index, but did very poorly on the spending index. Although these provinces project surpluses for 1996/97 based on forecasts of relatively strong economic growth, their appetite for increased spending may force a crash diet if this growth slows earlier than is expected. As we have already seen in British Columbia, planned surpluses can easily vanish.

Methodology

The Canadian Budget Performance Index is a composite of three sub-indices: "spending," "revenue," and "deficit and net direct debt." The data are taken from the federal and provincial government budgets for 1995/96 and 1996/97. Net direct debt figures are based on a projection from table 1.13 of Statistics Canada's "Public Sector Finance" for fiscal year 1995/96, and provincial public accounts for fiscal year 1994/95. Spending and revenue cover both current and capital accounts.

Spending Index

The spending index measures the extent to which governments plan to control budgetary spending between 1995/96 and 1996/97. Total spending and self-financed spending (spending net of federal government transfers to the provinces) are analyzed in table 3.

Click here to view Table 3: Spending Index Variables, 1996

The Spending Index is composed of six variables:

     1.     Spending per capita in 1996 (in dollars)

     2.     The percentage change in real spending between 1995/96 and 1996/97.

     3.     The percentage change in real spending net of federal government transfer payments between 1995/96 and 1996/97.

     4.     The change in spending net of federal government transfer payments as a percentage of Gross Domestic (Provincial) Product between 1995/96 and 1996/97.

5.The change in real spending net of federal government transfers per capita between 1995/96 and 1996/97.

6.The difference in the ratio of a province's spending per capita and the provincial government average spending per capita (between 1995/96 and 1996/97).

Revenue Index

The revenue index looks at how taxes and own source revenues (revenue net of federal government transfer payments to the province) are forecast to change over 1995/96 and 1996/97 (see table 4).

Click here to view Table 4: Revenue Index Variables, 1996

The Revenue Index consists of six variables:

     1.     The change in real tax per capita between 1995/96 and 1996/97.

     2.     The change in own source revenue as a percentage of GDP between 1995/96 and 1996/97.

     3.     The change in gasoline tax rates (in cents per litre)

     4.     The percentage change in the general sales tax rate.

     5.     The combined top marginal personal income tax rate (including surtaxes and flat taxes) and corporate income tax rate (measured in percent)

     6.     The percentage change in the combined top marginal personal income tax rate and the corporate income tax rates.

Deficit and Debt Index

The deficit and debt index measures the relative size of, and changes in, government deficits/surpluses and net direct debt (see table 5).

Click here to view Table 5: Deficit and Debt Variables, 1996

The Deficit and Net Direct Debt Index is composed of four variables:

     1.     The deficit per capita in 1996/97 (in dollars)

     2.     The change in the deficit as a percentage of GDP between 1995/96 and 1996/97.

     3.     The change in net direct debt per capita between 1994/95 and 1995/96 (in dollars)

     4.     The change in net direct debt as a percentage of GDP between 1994/95 and 1995/96.

Each variable is standardized so that the lowest score is zero and the highest score is 100. The variables are then assigned a weight of one and summed across their respective categories.

Budget Performance Index

The index showing the overall budget performance is obtained by averaging the spending, revenue, and the deficit and net direct debt indices.


Fiscal Restraint Can Be Successful: Canada Compared With Other Countries

Herb Grubel, MP, and Andrew Kosnaski

How does Canada's fiscal restraint program compare with similar restraint programs undertaken by other OECD countries? The OECD data are from a study by A. Alesino and R. Perotti entitled "Fiscal Expansions and Adjustments in OECD Countries," in the October 1995 edition of Economic Policy. The Canadian data were compiled by Andrew Kosnaski of the Reform Research Department.

Spending cuts and tax increases need not produce recessions

The study by Alesino and Perotti showed that on 52 occasions since 1945, different countries attempted to eliminate their deficits with a combination of spending cuts and tax increases. Only 14 of these attempts were successful in reducing the debt-to-GDP ratio by at least 5 percent; the others did not succeed.

The successful experiences show that strong fiscal restraint can work. Contrary to the expectations generated by Keynesian models, large reductions in aggregate demand caused by spending cuts and tax increases do not produce large recessions and even larger deficits. If they are done correctly, these measures stimulate the economy, generate surpluses, and result in significant reductions in debt.

Successful countries' cuts-to-tax ratio same as Canada's

The most fundamental characteristic of successful fiscal restraint programs is a high ratio of spending cuts to tax increases. Spending cuts signal that the government has the political will to reduce waste and the role of the state in the economy. Tax increases signal the govern-ment's determination to continue on the path of ever greater government. Therefore, the higher the ratio, the more confidence is restored in the government and the economy. In the wake, consumption spending remains strong, and domestic and foreign investment are revived. This view is supported by the finding that the ratio of spending-cuts-to-tax-increases was 4.9 for successful countries and .4 for unsuccessful countries. In comparison, during the last three years, Canada's fiscal policy resulted in a ratio of 4.9, identical to that of the successful countries. This bodes well for Canada, even though the decline in the debt-to-GDP ratio has still to take place.

Differences in spending cuts

While Canada's ratio of spending-cuts-to-tax-increases is high, the nation has not done as well as the successful countries with respect to the types of cuts undertaken. Table 1 shows the record of the successful and unsuccessful countries along with Canada's record over the last 3 years. The table's final row shows the difference in cuts between Canada and the successful countries.

Click here to view Table 1: Spending Cuts by Type, as a Percent of Total Cuts (Projected, 1994-97)

As the table shows, Canada cut public investment and non-wage public consumption considerably more than did the successful countries. At the same time, Canada reduced the size of transfers, government wages, and subsidies less than did the successful countries.

Cuts in public investment are politically easy since such spending benefits only a small constituency of voters and future generations affected by them have no votes at all. Public consumption expenditure, like transfers, wages, and subsidies, on the other hand, have strong constituencies of voters and therefore cutting them carries a high political cost.

While Canada's pattern of spending cuts offers political advantages to the government, it reduces overall investment and increases consumption. Therefore, it is bad for economic growth. Such cuts are also unfair to future generations, which already are burdened with very high debts and unfunded liabilities of the pension and medicare systems, and will inherit a smaller stock of public capital.

These facts suggest that the government of Canada has failed to accept the need for lower public consumption, as did governments in countries with successful fiscal contractions. It is therefore no surprise that consumers and investors have not increased spending enough to restore economic prosperity. Happily, the analysis also points the way for governments who have both the courage and the intent to do what is required to simultaneously cut the size of government and encourage private growth.

Downsizing the State

Chris Sarlo

Big government is in retreat! Are we seeing a discernible trend towards deregulation and smaller government, or is this just wishful thinking? While the size and scope of the state tends to ebb and flow (what Robert Nozick refers to as the "zigzag of politics"), it is easy to make a case that a permanent downsizing is under way in Canada, in America, in parts of Europe, in South Asia, in New Zealand and, most recently, in Israel.

It seems to me that there are three potential rationales for reducing the size of the state: philosophical, economic and pragmatic. Philosophically, it can be argued that once you get past the euphemisms, the state is fundamentally a coercive instrument which restricts individual freedom and creativity. In economic terms, it is the case that substantial government intervention reduces efficiency in the economy, resulting in fewer jobs and lower average living standards. The pragmatic rationale for downsizing government is simple: a huge debt and the political inadvisability of raising taxes means that government must cut its spending. Currently, in Canada, the third rationale dominates. Debt drives down-sizing.

Whatever the motivation, government downsizing can be done well or it can be done badly. An example of the latter was the so-called "social contract" policy of the Bob Rae government in Ontario in 1993. The government wanted to cut its spending but not lay off any workers. This was done by reducing grants to the broader public service (which includes government workers, municipalities, universities and colleges, and hospitals) and mandating that those institutions correspondingly reduce their spending by cutting wages across-the-board for a three year period.

There are two problems with this approach, despite the intended compassion. First, a major part of the cause of the debt problem was that the public sector was far too large. There were simply too many people working for government. The public sector in Ontario swelled during the 1970's (under conservative governments) as rapidly rising income and household spending expanded government tax revenues. Apparently, there wasn't a problem that couldn't be solved by creating an agency or commission to deal with it. By the late '80s, the Ontario public service was a bloated and inefficient dinosaur. It was filled with jobs that never should have been created. Bob Rae decided to leave it intact.

The second problem with the "social contract" solution was that it was unfair. Some workers in the wider public service suffered substantial financial losses while others had no loss at all. Indeed, some workers actually received increases during the social contract period. Some public servants received full financial credit for promotions while others, academics in particular, received nothing for their promotions or progress through the ranks. The financial impact of the "social contract" was massively uneven and unfair.

While in principle it should be possible to reduce wages and salaries so that everyone takes an equal hit, governments are simply not that creative. It would have been far better if the government had simply cut funding and let the bargaining agents within each institution work out how they would adjust. This approach had much greater potential for both fairness and efficiency. I wish to suggest a more fundamental long term approach to downsizing the state.

We begin with a thorough examination of the appropriate role of the state. What is it that we need the state to do for us that we cannot do for ourselves? Will the free market and voluntary private arrangements produce better results, especially for the least advantaged, than state action? If so, we need to resist the temptation of asking government to act. Every society should engage itself in this inquiry periodically. Different societies will make different choices regarding the role of the state and those choices will probably change over time.

There is likely to be a widespread consensus on certain core functions of the state, such as policing, justice and dispute resolution, national defence and (perhaps) the provision of some public goods. On pragmatic grounds, even libertarians tend to grant certain minimal core functions to the state. There may also be a consensus about certain exclusions. In Canada, for example, the elimination of state grants and subsidies to private, for-profit businesses (including farms) has growing support. As well, government funding of special interest groups is less favourably regarded. The privatization of many crown corporations, including the Post Office, is politically more feasible now. Finally, the privatization of the government-run pension plan, with appropriate grandfathering for older workers, is now a distinct possibility.

The real debate is likely to occur in the areas of health care, welfare, education, regulation (especially regarding health and safety), and foreign aid. While it is not at all clear that public monopolies are required in these areas, it is the case that the arguments for state intervention are not easily dismissed. What we do know is that technology has made and continues to make it easier to privatize and deregulate.

Once we have decided on the appropriate role of the state, we need to jettison those functions that are no longer justifiable. We should do so in a humane and compassionate manner. This would include ample forewarning (at least one year), reasonable buyout packages for older workers, transfers on the basis of productivity and not seniority, and possibly retraining. I say possibly because the record of state retraining programs has not been good. Periodic reconsideration of the role of the state, with a view to moving out of the hands of the state any activity or function that is more appropriately left to private decision making, is essential if we are to avoid the mistakes of the past.


Blame Ottawa, not the Private Sector for Less Job Growth

Fazil Mihlar

Prime Minister Jean Chrétien recently declared victory over the fiscal problems plaguing the federal government. He went on to say that the government has done much to foster a climate for job creation but that Canadian firms are not doing enough to create more jobs for Canadians. Let's review the evidence in order to evaluate meaningfully the PM's contentions.

First, since the fiscal year 1993-94, the net federal public debt has increased by about $100 billion. Interest costs to service the public debt increased from $38 billion to $50 billion during the same period. The federal government's net debt-to-GDP ratio at 73.4 percent is one of the highest amongst industrialized countries. This increasing debt load and its associated servicing costs has put the federal government in a fiscal straight jacket. In addition, any time the government runs deficits, that translates into deferred taxation, and future tax relief is simply not on the horizon. Therefore, this fiscal position simply is not conducive to investment and job creation.

Second, Canadian taxes are nearly 7 percent more as a percentage of GDP than those of its top five trading partners. Moreover, total government spending as a percentage of GDP is about 10 percent higher in Canada than in the countries with whom we trade. Economic studies indicate that high tax rates retard economic growth and consequently job creation. These higher levels of government spending and taxes in Canada suggest that we are not "open for business," as the PM would have us believe.

Third, payroll taxes have risen substantially. For example, employer UI and CPP/QPP premiums rose from $1.50 and $1.80 in 1971 to $4.30 and $2.60 by 1994 respectively. Taxing labour income (payroll and income taxes) for instance, drives a tax wedge between the employer's cost of hiring a worker and the after-tax income the worker receives. This tax wedge reduces the incentive to work and discourages firms from hiring new workers by raising the cost of labour. Firms have, and will, substitute capital for labour. The blame for sluggish job growth, therefore, should be laid squarely on the shoulders of the federal government and not on the private sector, which, in spite of the tax burdens, created nearly 800,000 jobs over the last four years.

Fourth, all too often the debate over the best policies to foster economic growth centre only on the size of the deficit and debt or taxes. Escalating regulatory costs, which by their very nature are hidden from the consumer, are often left out of the discussion. But the burden of regulations, in spite of the rhetoric of deregulation, has been increasing rapidly in recent years and is an important factor in explaining the lack of higher levels of economic growth and job creation. For example, the federal government has passed, on average, about 1,100 regulations per year over the last two decades. More regulations and the associated costs of compliance for firms drive up transaction costs and thus discourage investment and job growth.

For all these reasons, the prime minister's rhetoric does not match his government's actions over the past few years. Ottawa needs to speed up its deficit and debt reduction plans. In addition, the government must remove unnecessary regulations and reduce personal income and payroll taxes. If the federal government does that, it can then rightly claim to have created an environment conducive to job creation. Until then, the government should tone down its rhetoric, and concentrate on the enormous task of reducing the size of government in the Canadian economy.

[Fazil Mihlar recently completed a study of regulation in Canada. Entitled "Regulatory Overkill," it will be available as a Critical Issues Bulletin in September 1996. Call the Institute at (604) 688-0221 for details.]


September Questions and Answers

Joel Emes

Q:How much does the federal government transfer to other levels of government?

A:As table 1 shows, in the 1995/96 fiscal year, the federal government transferred $41.9 billion in cash and tax transfers to the provincial, territorial, and municipal governments. The main transfer programs are: Equalization, Territorial Financial Agree-ments, Established Program Financing (EPF), and the Canada Assistance Plan (CAP). Transfers under Established Programs Financing are directed to spending on insured health services and post-secondary education. Transfers under the Canada Assistance Plan cover the federal govern-ment's share of the cost of provincial social assistance programs. At the beginning of the 1996/97 fiscal year, CAP and EPF were replaced with the Canada Health and Social Transfer (CHST).

Click here to view Table 1: Estimated Federal Transfers to the Provinces, Territories, and Municipalities, 1995/96 (in $ millions, unless otherwise indicated)

Q:How does Canada compare with other industrialized countries in unemployment and general government expenditure?

A:Table 2 shows the OECD's 1996 projections for unemployment as a percent of the labour force, and general government expenditure as a percent of GDP for some member countries. Canada is above the OECD average for both categories, with unemployment at 9.3 percent compared to the average of 7.7 percent and general government expenditures at 45.2 percent of GDP compared to the OECD average of 40.8 percent. Also of interest is data from the G7 countries. Those with a higher than average level of general government expenditure also have a high unemployment rate (Canada, France, Germany, Italy, and the United Kingdom) and those with low government expenditure have a low unemployment rate (Japan and the United States).

Click here to view Table 2: Unemployment and General Government Expenditure Projections (1996)


Hong Kong, Canada, and the Future

Stephen T. Easton

As the world's most economically free country, Hong Kong has managed to grow and prosper, in spite of the uncertainty associated with China reasserting political and economic control over it in July 1997. After my own first visit to Hong Kong last month, I wish I had the same optimism about Canada's rate of growth and prosperity. From 1970 to 1993, income per person (per capita Gross Domestic Product) in Hong Kong grew from $900 to $13,000. Consider our own performance in contrast. Canadian income grew from $3,800 to $20,000 during the same period. If we had been as successful economically as Hong Kong, we would currently have income above $55,000 per person, more than double current levels. Not bad, eh?

What is conspicuous about Hong Kong is that it is the freest country in the world in which to do business. Among the 103 countries ranked in The Fraser Institute's Economic Freedom of the World, which develops an index measuring 17 attributes of economic freedom, such as levels of taxation, government spending, and the like, Hong Kong ranked number one. For example, the top personal income tax bracket in Hong Kong is 15 percent. The corporate tax rate is the same. In contrast, the average Canadian family pays almost one half its income in taxes, and the income tax rate has been rising for the past three decades. Remember the GST? Hong Kong has no sales taxes. The price you see is the price you pay.

Economic freedom tends to be related to economic growth. In Hong Kong the relationship is manifestly powerful. But can we compare Canada and Hong Kong? They are so different, at least on the surface. Although it may not seem to be the case, in a number of ways, Hong Kong and Canada are surprisingly alike, and have many of the same economic problems and opportunities. Hong Kong, however, has lower taxes.

If we had been as successful economically as Hong Kong, we would currently have income above $55,000 per person, more than double current levels.

Aside from the obvious difference that Hong Kong's six million people inhabit a land mass that is 1,040 square kilometres while Canada's 30 million people are nominally spread over 10 million square kilometres, Hong Kong and Canada share a number of attributes. Both share a common law heritage inherited from the British. Both are trading nations. Both have two languages in active use. Both have large neighbours both rich and poor who are politically and economically important.

But there are other parallels between Canada and Hong Kong as well. Hong Kong faces an uncertain political and economic future. Although my colleagues in Hong Kong feel confident that China will not change the basic rules of economic activity, there is no question that the political landscape will be quite different in a few years. If they are wrong about the economic implications of Chinese political control, no one doubts that income in Hong Kong will fall precipitously. In Canada we have the same kind of problem. Although our current political leadership remains astoundingly intent on ignoring debate about the terms of Quebec's separation, any reading of the past quarter of a century of Quebec politics would lead a sensible observer to conclude that Quebec's separation from the rest of Canada is very possible.

As in Hong Kong, where there is no talk of alternatives (except flight for those few holding foreign passports), Canadians have stilled any discussion of alternative political and economic arrangements at the national level. Plan B: The Future of the Rest of Canada, which serves as the title of Gordon Gibson's forceful book written two years ago, tried to stimulate the Ottawa bureaucracy into activity, but as in Hong Kong, official bureaucracy and lethargy go hand in hand until the crisis is upon us. Imagine the frenzy in Canada's political climate had there been a change of one percent toward the "Oui" option in the last Quebec referendum. Imagine the economic costs as people and companies would be trying to decide where to live and work. We are not used to thinking about it, but Canada and Hong Kong share the uncertainty associated with potential political change. At least in Hong Kong the fact of amalgamation is settled. Canada will again be on tenterhooks in 18 months or so.

So Canada and Hong Kong face parallel problems. Both have risk characteristics that are difficult to assess and are frequently ignored by residents. Both are small economies in their regions and take massive advantage of the opportunity to trade. But Hong Kong has been growing faster than Canada, and its residents' take-home income has been growing even faster. Can one live a life that is fulfilling outside of Canadian tax rates and social institutions? A visit to Hong Kong provides a glimpse of an alternative set of arrangements that generate economic growth and prosperity based on lower taxes. While Canadian nationalists encourage us to travel to Quebec to increase our understanding, perhaps we can best see ourselves and our opportunities from the vantage point of Hong Kong island.


A Debate About Separation and Supermajority

Tom Flanagan and Gordon Gibson

[Tom Flanagan and Gordon Gibson exchanged the following thoughts and ideas in recent correspondence. We reprint them in edited form here.]

Tom Flanagan:
Both the prime minister and Stéfane Dion, the Minister of Intergovernmental Affairs, have mused in public about requiring something more than a simple majority in a future Quebec referendum on sovereignty. Dividing the country, it is said, has such profound implications for all Canadians, both inside and outside Quebec, that it should not be done lightly, on the basis of a small and perhaps transitory majority. The argument is convincing at an abstract level, but the conditions in which we actually find ourselves make supermajority a dangerous as well as an unnecessary idea.

First, it would break with historical precedent. Canada has held three national referendums, Quebec has held two on sovereignty, and Newfoundland held a two-stage referendum on confederation with Canada. In all of these votes, the decision rule was simple majority. Moreover, the federal government participated in both Quebec sovereignty referendums on the understanding that 50% + 1 would be decisive. To announce unilaterally that the decision rule will be different in the future looks suspiciously like bad faith.

This would be trumpeted by the separatist forces as another humiliation and thus may encourage a Yes vote in a future referendum. It would also draw further attention to the ethnic voters in Quebec, who frustrated the majority support of francophone voters for sovereignty in the recent referendum.

Most seriously, however, a supermajority rule may provoke a unilateral declaration of independence (UDI). If we set the bar so high that it is impossible to jump over it, the separatists may try to run under it instead. Claiming that Canada is not dealing in good faith, they may even dispense with a referendum altogether and go back to the pre-1976 Parti Québécois doctrine that a PQ victory in a provincial election would suffice for independence.

If a supermajority is dangerous, it is also unnecessary; for it is simply not true that Canada can be divided by one vote in a provincial referendum. The separation of any province requires a constitutional amendment, so a referendum victory for the Yes side can do no more than legitimate a request from the provincial government to begin negotiating separation.

It is of transcendent importance that the federal government enforce the constitution to protect our interests. Presumably, our elected politicians will not ratify an amendment until Quebec agrees to reasonable terms on the matters that need to be negotiated. Of course, Quebec has its own weapon in UDI, which could do grave damage to the Canadian economy. However, it would cause even worse damage to the smaller and weaker Quebec economy, so that Quebec would probably not resort to it as long as there was reasonable hope of achieving separation through constitutional amendment.

Unfortunately, it is late in the day. For 30 years, Quebec separatists have been left uncontradicted while they made public claims about their right to issue UDI. Meanwhile, prominent Canadians have repeatedly said that force would never be used to keep Quebec in Canada. This may be true, but it is only part of the truth. One must contemplate the use of force to ensure that the departure of Quebec takes place under the rule of law, just as one would enforce the constitution in other respects.

Insistence on the rule of law also disposes of another red herring in the debate-the wording of the referendum question. If Canada were to be divided solely on the result of a provincial referendum, the wording of the question would be vital. But if the constitution is followed, separation cannot take place until the Quebec National Assembly approves a constitutional resolution embodying the negotiated terms of separation. This might or might not entail a second referendum in Quebec, but at least it means that Quebeckers will know what they are getting into.

If we set the bar so high that it is impossible to jump over it, the separatists may try to run under it instead.

Federal policy, thus, should include the following elements:

     1.     Categorical acceptance of simple majority as the decision rule in any future Quebec referendum on sover- eignty.

     2.      Insistence that a Yes vote in a referendum does not legitimate UDI. It is a request to begin negotiations, nothing more.

     3.     A declaration that the federal government will negotiate in good faith if the Yes side triumphs, and will do its best to ensure that the provinces also negotiate in good faith.

     4.     Emphasis on the constitution and the rule of law in public statements, specifically the need for separation to take place through a constitutional amendment. UDI must be ruled out as an acceptable option. Privately, the prime minister should apprise the premier of Quebec of his determination to use all means to enforce the rule of law.

There are never any guarantees in politics, but this course of action is the best hope Canadians have of protecting our interests in the event of a full-fledged crisis of national unity.

Gordon Gibson:
Tom Flanagan is right in his contention that a "Yes" vote of just 50%+1 would be decisive on a future Quebec referendum on sovereignty. But in my opinion, his main reasoning is wrong, with important consequences.

Flanagan says that even after such a vote, no problem, independence would still have to be negotiated. This means that the rest of Canada, and perhaps even Quebeckers in another referendum, would have to give their approval of the exact terms and conditions. Unless, of course, they did a UDI . . .

But, he says, that would not happen. First of all it would be unlawful. Second, it would harm the Quebec economy, and finally, "One must contemplate the use of force to ensure that the departure of Quebec takes place under the rule of law."

I can imagine that Viscount So-and-So, in the British Colonial Office of 1775, probably wrote a similar memo about the chances of an American UDI. The difference is, the Brits actually were prepared to use force-and they still lost. The United States became independent.

The success of a UDI has nothing at all to do with the rule of law, except in public relations terms. It either works, in the sense that the local populations and other nations accept it, or it doesn't. The chances of other Canadians supporting the shooting of bullets at Quebeckers by the army, assuming the army would be prepared to do that, are just about zero. Forget the use of force, except for smaller and privately-run terrorist type raids and explosions.

So, now what? Say we have a "yes" vote, and then an impasse in negotiations, after some length of time. Say we have de facto recognition by France, and noises from the United States that if Canada breaks up they will want to review NAFTA and the Auto Pact for both Quebec and ROC. (The Americans are nice guys who do win ball games-by being tough.)

And then we have a UDI. ROC will be too preoccupied with its own future (would B.C. and Alberta stay in the new grouping?) and with its own commercial interests to spend a lot of time on Quebec's new status. The only impediment to the success of the UDI at this stage would be civil unrest inside the seceding province.

In terms of ongoing relationships, Quebec would be wielding the debt weapon, noting that the address on the national debt is Ottawa, not Quebec City. I think that the Flanagan rule of law would quickly yield to the realpolitik rule of "let's make a deal." If the debt issue was not resolved, the only question would be the degree of damage shared among domestic and foreign owners of Canadian financial assets (including pensioners), and whether ROC and Quebec could continue as viable societies. (My guess is that ROC would split, and Quebec would be riven by internal division for a generation. Thereafter, everyone would be fine.)

As in every such discussion, it rapidly becomes apparent that the only rational course is to preempt the problem by restructuring the country on a decentralized basis satisfactory to Quebec, the west, and the rest, so that the issue disappears. That makes sense to all of the players, except the current federal government


Pulling Out the Election Gag

Filip Palda

Contrary to what politicians think, politics is every-body's business. That is the message that came out of an Alberta court of appeal recently. The court struck down Ottawa's election Gag Law. The law would have made it a crime for private citizens to spend more than $1,000 to advertise their views during elections. The presiding judges made no secret of their disgust with this attempt to limit free speech by ordinary Canadians. Ottawa, though, does not seem to have heard the message. It is considering a further appeal. Why do our leaders have so strong an allergy to free speech?

Lately, Canadians have become skilled at criticizing their leaders. Nobody in power likes this trend. Well-organized grassroots movements asking intelligent questions are a headache for politicians. The unpleasant probing forces leaders to explain what kind of value they are giving for the tax dollars they collect. The headache of having to account for their actions might go away if the criticism stopped. A Gag Law is Ottawa's pill against the ailment brought on by free speech.

When politicians wrote the Gag Law in 1993, they twisted themselves into logical pretzels to explain why Canadians would be well rid of free speech. Free speech during elections, they argued, was a curse for most citizens. Only the rich could take advantage of it. That meant special interest groups with lots of cash could run malicious advertising campaigns to unseat decent politicians. To protect Canadians from being hypnotized by rich crackpots and extremists, official candidates were to be the only ones allowed to promote political views during an election campaign. Private citizens were to be allowed to spend a token $1,000. In other words, politicians were to have a monopoly on election messages.

The politicians who came up with this story left out an important detail. Serious academic researchers have not been able to prove that interest groups with lots of money can manipulate elections. Money, by itself, does not buy power. For money to have an effect it needs to be spreading a message of which voters approve. All the advertising in the world will not get you anywhere if you do not have a sound product. This is what the Yes side discovered in the 1992 referendum on the constitution. Ordinary Canadians were not impressed by the Yes side's $20 million advertising blitz. Voters are not lambs in need of higher guidance. They can usually figure out when someone is trying to manipulate them.

That voters have minds of their own and should be allowed to exchange ideas with each other will take a long time to sink in with our leaders. During the Quebec referendum campaign, hundreds of thousands of Canadians flew on cheap airline tickets to Montreal to show Quebeckers what they thought about separation. The Chief Electoral Officer of Quebec has called this amazing outpouring of popular feeling a crime. He is now taking the airlines to court. Apparently the airlines violated a homegrown Quebec version of the Gag Law. The real offense, though, was that of the Chief Electoral Officer and the politicians who approved his actions. Like officials everywhere, they showed how badly they are irked when people participate in democracy. Suffragettes fighting for the right to vote, students at Tiananmen Square asking for government reforms, and thousands of other citizen movements have all come up against this problem. The good news, as the judgment in the Alberta courtroom showed, is that eventually the citizens win.


Misguided Directions for Ontario

Cynthia Ramsay

Primary health care reform in Ontario has begun in earnest. Primary care services are those to which users have direct access without referral from another provider. Primary care providers include chiropractors, dentists, optometrists, pharmacists, and about half of the physicians in Canada who are generalists and specialize in providing primary care.Note The goal underlying the reforms seems to be cost containment, which is not surprising given that health care expenditures comprise approximately 35 cents of every dollar the government spends in Ontario. Public Institutions Division, Statistics Canada. Figure is for 1994/95 and includes program expenditures only. (Debt servicing charges are not included.)Note The reforms, however, are unlikely to prove successful as they do not address the fundamental problem-that the health care system has no transparent prices and thus no mechanism by which to efficiently allocate resources.

The reforms taking place in Ontario are the result of 24 reports on primary care prepared by various health interest groups in the province over the last two years. These reports form the foundation of the document New Directions in Primary Health Care Subcommittee on Primary Health Care of the Provincial Co-ordinating Committee on Community and Academic Health Science Centre Relations, New Directions in Primary Health Care, July 1996.Note which outlines the recommendations for primary care reform. The recommendations concern:

     •     the integration of local health services,

     •     access to an appropriate range of services for all communities,

     •     involvement of an appropriate range of health providers,

     •    evidence-based decision making and the use of information technology,

     •    the distribution of primary health care providers, and

     •    the responsiveness of the funding system.

However, New Directions in Primary Health Care only provides conceptual arguments for primary health reform; it does not provide any data supporting the new direction in which Ontario is headed. Furthermore, the goals articulated in New Directions, while perhaps valid areas for concern, are deficient as policy objectives in that the success or failure of their implementation is unquantifiable. For example, what constitutes an improvement of the integration of health services?

That there have been 24 reports on Ontario's health system seems to be proof enough for Ontario's Ministry of Health that such reforms are warranted.

[Ontario Health Minister] Wilson said it's about time there was more action and less study on the issue. As quoted in Matt Borsellino, "`Doctor Shopping' Solution Booed, Cheered," The Medical Post, August 6, 1996, p. 67.Note

The main tools that the Ministry will use to achieve these goals deal primarily with the remuneration of primary care providers. Capitation models will eventually replace the present fee-for-service system.

In fee-for-service, providers are paid a specific fee for each individual service rendered. Fee-for-service promotes efficiency in service and provides an incentive for handling a large number of patients. However, it also provides a financial incentive to treat a lot of patients who have little or no illness and fewer patients with difficult or chronic illnesses. In a capitation system, providers are paid according to the number of patients on their rosters. They are paid a set amount for each patient, and they provide all of that patient's primary care. Weighted capitation provides a higher per capita payment for patients who will require more attention, which encourages providers to take older or less healthy patients and, in theory, promotes improved access for those who need more care. However, capitation also provides an incentive to under service and not provide necessary care.

Ill-defined problems

The belief that capitation or weighted capitation will solve many of the health care dilemmas facing Ontario presupposes that physician payments and patient over-use of the health system constitute significant problems, and that by controlling them the efficiency and effectiveness of the health system will necessarily improve. However, contrary to the contentions of Ontario's Health Minister that "we [Ontario] can no longer afford to have patients see an excessive number of physicians when it isn't necessary," Ontario Ministry of Health, "Primary Care Reform," Backgrounder, July 18, 1996.Note Ontario fares rather well relative to other jurisdictions in comparisons of data on health expenditures, life expectancies, hospital beds, hospital stays, and numbers of physicians. Moreover, it appears that medical considerations such as life expectancy, and cost considerations such as expenditure on health care, are not directly related to the numbers of practising physicians, nor are they directly related to the number of patient visits to physicians.

Table 1 shows Ontario in a national and international context. In most OECD countries, women can expect to live 79 to 81 years and men 72 to 75. Canada is no exception and neither is Ontario: life expectancy for women in Ontario is 81 years, and for men 75.3 years. The Japanese have the longest life expectancy, at 83.3 years for women and 76.6 years for men, although that country spends much less on health care as a percent of GDP than Canada does. With respect to physician services, Ontario has fewer physicians as a percentage of its population (0.18) than Canada as a whole (0.22), the U.S. (0.23), New Zealand (0.20), Germany (0.32), and Sweden (0.30). As well, as table 2 shows, spending on physician services consumed a smaller percentage of health spending in Ontario in 1994/95 than it did 10 years earlier.

Click here to view Table 1: Some Facts About the Ontario Health System in an International Context (1992 to 1994 data unless otherwise specified)

Click here to view Table 2: Components of Health Spending in Ontario, 1984/85 versus 1994/95

Canadians, with a rate of 6.9 physician contacts per person each year, and Ontarians (9.1 contacts per year), Calculated from Ontario Health Insurance Plan data. In the 1994/95 fiscal year, there were 99,128,650 claims filed by physicians. This figure represents 9.1 claims per capita in 1994/95.Note use doctors' services at lower rates than people in countries such as Germany (12.8) and Japan (12.9), which both spend less than Canada does on health care as a percent of GDP. The Ontario Drug Benefit (ODB) program data reveal that "during an 18 month period there were over 130,000 cases of individuals seeking to fill a prescription for the same drug from at least three different physicians." Ontario Ministry of Health, "Primary Care Reform," Backgrounder, July 18, 1996.Note The Ministry of Health infers from this information that there is significant patient misuse of the health care system. However, as a percentage of the total number of cases processed by the ODB program, 130,000 cases represents merely 0.3 percent of the 42.7 million claims it paid out in the 1992/93 fiscal year. Claims paid data are from the Ontario Ministry of Health, Annual Report 1992-1993, Queen's Printer for Ontario, 1994, p. 18.Note

Another aspect of the primary care reforms in Ontario is that, "by emphasizing ambulatory, self and home care," the reforms will work to decrease stays in hospitals. Ontario Ministry of Health, "Primary Care Reform," Backgrounder, July 18, 1996.Note The average length of stay (ALOS) in acute care hospitals in OECD countries varies widely. Ontario's ALOS of 6.5 days hardly seems a cause for great concern (see table 1). The number of acute care beds per 1,000 population provides another insight into hospital expenditures. Ontario, with 2.4 acute care beds per 1,000 population, provides hospital services with significantly fewer acute care beds per 1,000 population than many countries. In addition, table 2 shows how spending on hospitals as a percent of total health spending in Ontario decreased by 5 percent between 1984/85 and 1994/95.


Recommendations for primary care reform For more information on health reform in Canada, see "Improving Health Care for Canadians" by W. McArthur, C. Ramsay, and M. Walker, in Healthy Incentives: Canadian Health Reform in an International Context (The Fraser Institute: Vancouver, 1996).Note

Ontario must consider the experiences of other jurisdictions before it begins to reform its own primary health system. For example, health reform in British Columbia (also called New Directions) failed because it neglected to include one important mechanism for ensuring that "people get the right services at the right time from the most appropriate provider": the market. The market will communicate patients' wants to care providers. It will allow for competition between providers which will ensure that providers respond appropriately and adopt the most efficient and effective methods of delivering health care. Until market mechanisms are put in place and the incentive structure of the medical system is overhauled, any reform is bound to fall short of its intent. Advantages, such as the reduction in hospital waiting lists in the U.K., and the significant increase in the number of surgical procedures in New Zealand illustrate the benefits of introducing market incentives to health care.

The proposals briefly described below have been tested and proven in other countries to bring about greater efficiency in the health care sector.


Separating purchasers and providers

Some public sector involvement in the delivery and financing of health care should be maintained but, in Canada, the government is purchaser, provider and regulator of virtually all medical services in the country. Separating purchasers and providers, and creating regional purchasing agencies (RPAs), is the first step in bringing competition into the system. RPAs purchase health care for the people of their region. They have a responsibility to develop contracts with providers and monitor the services being delivered. Private providers and private insurers should be permitted to operate.


Budget Holding

With budget holding, the government allocates funds to primary care providers, who then provide their patients' primary medical care. The allocated funds are used exclusively for patient services; none are used to remunerate providers directly, and any savings must be applied to enhance patient care. Patients are free to change primary care providers if they are unsatisfied with the service they receive. Thus, the budget holder must keep the level of service high, and indeed must improve it in the face of competition from other budget holders. Budget holding in the U.K. has resulted in improved patient care, including reduced waiting times for surgery and improved access to diagnostic tests.


Medical Premium Accounts

An alternative to budget holding is for the government to allot health care funds directly to the consumer in the form of a medical premium account (MPA) which is made up of two parts: the cost of catastrophic insurance, and the funds in an individual's account. In an MPA plan, patients pay their provider directly for most of their care from their government-funded account, so that everyone is aware of the costs involved. Patients have an incentive to "shop around" for services because they keep, in one form or another, any funds remaining in their account at year end, and health providers have to compete for clientele, so they have an incentive to reduce their operating costs without reducing the quality of service.


Conclusion

As they stand now, the proposed primary care reforms in Ontario will not prove effective because the problems have been ill-defined. Closing hospitals, cutting the number of hospital beds, restricting doctors' billing numbers, and moving to capitation funding are misguided attempts at reform. The OECD data indicate that such measures will not necessarily improve Ontario's health care system. The object of any health reforms must be to restructure the health care system's incentives, not simply to manage or administer the system differently. New Directions in British Columbia has proven to be such a failure that the government recently decided to "put all regionalization activity temporarily on hold." B.C. Ministry of Health, "New Minister Outlines Priorities for Health," News Release, June 21, 1996.Note Unfortunately, it appears that Ontario's health reform is simply taking a different route to the same dead-end.


Saving the West Coast Salmon Fishery

Laura Jones

After a year of negotiating with the industry that depends on salmon for its livelihood, the Department of Fisheries and Oceans (DFO) this spring announced its plan to introduce new area licensing requirements and spend $80 million buying back fishing licenses in British Columbia. How have fishers responded? They are angry and deeply frustrated-and rightly so.

There is no reason to be optimistic that buying back licenses and restricting fishing areas will be effective. It is not a new strategy, nor has it worked in the past.

ITQ management has successfully resuscitated fisheries on the edge of collapse in many countries. Iceland is just one example.

Since 1969, salmon management in B.C. has focused on limiting the number of licenses issued, limiting the number of opportunities to fish, and restricting the equipment used to fish. This type of management has neither conserved the resource nor created an efficient industry that can function without public subsidies. Yet we are still trying to put new spins on these ineffective old policies. Fortunately, there is an alternative.

Individual transferable quotas (ITQs) are an alternative to the DFO's restrict-the-amount-of-effort-that-goes-into-fishing style of management. Under an ITQ system, rather than indirectly trying to control the number of fish caught through license and fishing area and gear restrictions, participants are given the rights to a proportion of the total number of fish harvested. ITQ management has successfully resuscitated fisheries on the edge of collapse in many countries. Iceland is just one example. Despite the many successes of these programs, the idea of quotas for salmon has not received much review in Canada.

Why do fishers so vehemently oppose changes that might save their failing industry? Fishing represents the last vestige of the hunter-gatherer society. Fish are the only wild animal that is still hunted commercially in any quantity. The competitive race for the fish is an exhilarating form of high stakes gambling. Racing against other fishermen is part of the game. When fishers pull in their nets, they could have nothing but seaweed and dogfish or they could have a net teeming with salmon. Fishers can have highly productive seasons when they haul in hundreds of thousands of dollars, or their catches can be so pathetic that the season is a complete loss. The free-for-all hunt passed down from generation to generation partly explains why the "protect the way of life" argument carries so much weight in the fishing industry.

The free-for-all hunt passed down from generation to generation partly explains why the "protect the way of life" argument carries so much weight in the fishing industry.

The buyback and restrictions on fishing areas remain more attractive than quotas because they allow for the thrill of the chase. There is no race in a quota system. Controls, however, are unsuccessful for the same reason they are popular-they do not eliminate the race for the fish. In fact, controls add to the complexity of the race. To stay ahead, fishers have to innovate around the restrictions on their efforts. For example, length limits were imposed on boats in an attempt to reduce the number of fish a boat could take in. Instead, they led to the use of new boats with wider and deeper hulls.

It is time to face some hard facts. In addition to the looming conservation crisis, the salmon fishery is an economic disaster. In 1994-95 approximately $3.4 million was generated from commercial salmon license fees, while about $49 million was spent managing the salmon fishery. The current way of life in the fishery cannot be maintained without continuing increases in taxpayer subsidies. Unemployment payments to B.C. fishers have risen steadily over the past decade. Estimates from Human Resources Development Canada indicate that $1.85 is paid out for every $1 in premiums collected in the Pacific Region fishing sector.

The ITQ solution is economically viable. It could successfully allow for sustainable employment in the fishing industry by putting conservation first and short term employment goals last. This option takes away the uncertain lottery component of fishing and replaces it with the certainty of a proportion of the catch. As the allowable fish entitlement is set beforehand, larger profits can only come from keeping fishing costs low and by improving marketing. Quotas would foster longer fishing seasons, make fishing safer, increase the price that fishers get for their catch (as they can sell fish fresh rather than frozen), and end allocation disputes.

ITQ management has saved fisheries that were on the verge of collapse elsewhere. Since the introduction of ITQs to Iceland's failing herring fishery in 1975, catches have increased almost tenfold, and the fishery is more efficient-a greater number of fish are being caught with fewer boats. Closer to home, the black cod fishery in B.C. was facing eight-day long seasons until the introduction of quotas extended the season to a full 365 days.

In addition to the looming conservation crisis, the salmon fishery is an economic disaster.

Quotas would fundamentally change the nature of the fishing game. But the nature of the game will change one way or another. The current path will surely see the depletion of the resource, and no fish means no fishing industry.

If we want to have a fishing industry in Canada 10 years from now, we must consider new solutions. Quotas reflect a different way of thinking: a way of thinking that could save the salmon.


Private Prisons Offer Superior Service

Michael Walker

Recently The Fraser Institute spent two days discussing an idea which many people, on the face of it, think is ridiculous, namely, the privatization of prisons. While this idea was first discussed by the Institute more than 10 years ago, the recent Toronto conference was the first major attempt to introduce the idea to a broad audience. To do so, the Institute assembled experts from North America and Europe.

The presenters were largely people who are actually in the business of providing private prison services. The audience, on the other hand, consisted largely of public sector prison providers or their quasi-private, government-supported networks in the form of groups like the John Howard Society, which contract with governments to provide services to inmates and former inmates.

The evidence from the United States was overwhelming in its implication that private prison services are not only cheaper for the taxpayer, but also provide a better environment for the inmates and a better work experience for the custodians. The evidence of superior performance was so compelling that the questions and discussion from the sceptical audience largely turned on issues of values.

Said the audience participants, "it may be possible to produce lower cost prison services in the United States, but what about the values which are being expressed in the provision of the services? We want Canadian values expressed in our prisons, not the values which are typical in the United States." The conference participants were probably expressing a popular sentiment. However, these concerns were put to rest at the first luncheon speech delivered by Mr. Tim Wilson, who manages the contracting for private and public prison services in the United Kingdom-a jurisdiction presumably having more Canadian-like values.

Wilson confirmed the view expressed by the U.S. prison management firms in noting that the values expressed in a prison system are not of concern to the operating companies. They simply operate the services contract which is negotiated with the public prison providers. It is up to the public sector contractor to specify the values they wish to reflect.

Wilson informed the audience that in the United Kingdom private prison providers not only saved the taxpayer from 15 to 22 percent of the cost of providing prison services, but also provided the inmates and the guards with a superior experience. In other words, the evidence from the United Kingdom is the same as the evidence from the United States: there does not seem to be a significant value question involved. Private prison services are often simply better than public prison services.

The main reason private suppliers do a better job is they organize the system of prison service production differently than their public counterparts. This ranges all the way from prison construction to working shift structure.

The private prison construction relies on an idea identified more than a century ago by the famous British entrepreneur and social reformer Jeremy Bentham. He had an idea for a private prison called the Panopticon, so-called because it was designed so that a single custodian could observe all of the activities going on in the cell system. The effective use of sight lines in private prisons accomplishes the same sort of objective.

There are no privatized prisons in Canada yet. However, the government of Nova Scotia is considering its total custody system in conjunction with a private prison provider and will decide during the next year whether to privatize part, all, or none of the provincial prison system. New Brunswick has taken the option of pursuing the private financing of a prison, but the prison itself will be operated by the public sector.

The preliminary evidence from the United States is that not only is the prison experience less dehumanizing when the services are privately provided, but the recidivism rate is much lower, particularly for young offenders. This result is the most important reason for opting for private prisons in Canada. On the basis of our exploration it seems obvious that private prisons will be setting the standard for prison services in Canada by the end of the next decade.


Class Warfare and Bad Software

Mark Weller

Recently, a class action suit was filed in a Pennsylvania court against Corel Corporation, Canada's leading software developer. In Fishbein vs. Corel, the plaintiff is seeking to represent users of CORELDraw 3.0, 4.0 and 5.0, claiming that Corel did not sufficiently test these products before they were shipped.

For many, particularly those frustrated by the lack of software testing, this legal action may seem like a vindication. Finally, it would seem, someone is standing up for the little guy, defending him against unfeeling software giants. This assumes, however, that the marketplace has failed to punish companies that send software out to consumers without properly testing it, and this is simply not true, not even in the case of Corel.

The software industry as a whole is a very volatile one precisely because of the high expectations of consumers. If one were to factor out the few big software success stories, the history of software development involves constant change as new projects are developed and new bankruptcies occur. It is a tough business, and consumers have little tolerance for companies that produce software that does not live up to its claims.

When the news came out that Corel's latest version of COREL-Draw had "bugs," the immediate effect was a mass sell-off of Corel stock, on both the TSE and NASDAQ exchanges. Corel was forced to respond to unsatisfied customers by offering software patches and by processing refunds. In the end, having released an unpopular product, Corel was led by the market to respond quickly to its customers and its investors-it suffered in the marketplace for its error. Although there may be many upset consumers, and understandably so, Corel's actions to address their concerns has helped to restore the value of its stock. So the market did its job.

However, even if the market was somehow failing, it still does not make sense for these kinds of disputes to be settled by a class action suit. If the matter is one of an unfulfilled contract, that of course has a place in court, but the whole idea of class action is quite different.

In a class action, the accused party is charged with having committed an offense against a class of people. In the suit against Corel, the key rationale of the case is that the consumers suffered financial loss due to the untested software-financial losses for which the software company is liable. This is despite the fact that Corel indicates on its products that they are not liable for losses suffered by individuals or companies who use their products. Corel is still liable, says the suit, because it failed to meet a minimum product standard that the consumer should be able to expect from any company. In addition, Fishbein vs. Corel alleges that the Corel warranty is not even valid in the state of Pennsylvania. So, even though Corel informed consumers of the risks, it no longer matters because the contract is not valid. So much for contracts; by this logic a contract between a consumer and a supplier is only binding on a single party: the supplier.

There is no excuse for the lack of planning and testing that software companies often demon-strate in the premature shipping of new products. However, rather than driving these companies into bankruptcy through an arbitrary court process, society should rely on the market actions of their actual and potential customers and investors to punish them. It is through this market discipline that better products and better procedures will be developed, and poorly performing firms driven out of the market.


Tinkering With Democracy

Karen Selick A version of this article has previously appeared in Canadian Lawyer.Note

Although I'm not a member of the Reform Party, I had the opportunity back in June to attend its annual convention in Vancouver as a guest speaker. This was the second Reform Party assembly I've been to.

Both times, I was struck by the great concern Reformers show for the Canadian system of democracy. They are forever coming up with proposals to make it work better. Their suggestions include an elected Senate, more frequent referendums, more free votes in the House of Commons, and the power to recall elected representatives. I also heard discussions about converting to a system of proportional (as opposed to regional) representation, under which seats in parliament would be filled according to the percentage of popular vote each party gets.

I must confess that I have always had a love-hate relationship with the concept of democracy myself, treasuring Winston Churchill's wise-crack that it is the worst possible system of government except for all the others. Representative democracy in particular sticks in my craw, whether proportional or geographic. With so many unrelated issues to be represented on, and so many possible positions that can be taken on each issue, chances are slim that voters will find a candidate who accurately represents their views even a modicum of the time.

However, even if we discarded the representative system and allowed each individual to represent himself on every issue through perpetual plebiscites, we still wouldn't have solved all the problems of democracy. There remains what Lord Acton called "the one pervading evil of democracy . . . the tyranny of the majority."

Every decision in the political realm is always a yes-or-no, win-or-lose proposition. That's the way politics works. No matter how thoroughly minorities are represented in the voting population, no matter how close the vote comes to being a tie, and no matter how you monkey with the requirements for winning, when the final tally is announced, one side or the other just plain loses. In an election won by Mr. X, those who voted for Mr. Y can't just shrug off the majority's decision and start paying their taxes to the Y government instead. Who can blame the average citizen for finding such a system frustrating?

Every decision in the political realm is always a yes-or-no, win-or-lose proposition.

Luckily, there is a whole realm of human activity where this kind of frustration virtually never occurs. People who are exasperated by their powerlessness in the political system should take a look at this other way of getting things done. It's called the marketplace.

When I make the decision to buy a car, I don't have to worry about whether the majority of my neighbours will be choosing Toyotas rather than Fords this year. Even if I find myself in the minority, I will still be free to buy whichever I prefer. In fact, being in the minority may even offer me an advantage, since prices will tend to be lower for items which are not as much in demand.

Not only does the marketplace offer me the right to have my way regardless of what the majority thinks, it also provides me with better information for making my choice. The latest model Fords and Toyotas have both been available for me to compare at any given moment during the last few years. But when I have to make the political decision of whether to vote for the Reform Party or the Liberals, I am not able to compare the Reform administration of the last few years with the Liberal administration of the same vintage-there hasn't been one.

Marketplace decisions have another advantage over political decisions: they give the man in the street a greater incentive to inform himself about the things he'll be faced with deciding on. I know that I will actually end up with the car I select, so I take pains to research my options and make a sensible decision. In the voting booth, however, I get not the choice I have made, but the choice that the majority has made. The probability that my ballot will make any difference to the outcome of the vote is tiny. Why should I go to a lot of trouble to ferret out detailed information about something I can't change anyhow?

Not only does the marketplace offer me the right to have my way regardless of what the majority thinks, it also provides me with better information for making my choice.

What conclusion should we draw from all this? Well, not the one so many of our politicians and public interest groups have drawn. They want to transform certain "social goods"-day care, housing, health care, and so on-into legal entitlements. This would inevitably make these goods subject to political decision-making, which would mean majority rule-and minority frustration-all the way.

As for the Reform Party, they should realize that no matter how they tinker with the mechanisms of democracy, they still won't have remedied its basic problem. It is not simply a case of the system needing the ultimate tune-up in order to work right. It will never work right if it tries to intrude into matters that can be better dealt with through non-governmental means.

If Reformers really want to give every Canadian--members of minority groups and members of the majority alike--the best opportunity to fulfil their hearts' desires, their focus should be on fighting like mad to keep as many goods and services as possible out of the political realm and in the realm of the marketplace instead.


Reengineering the Purchasing/Payment Cycle in the Government Sector: How the Federal Government Can Save Millions in Processing Government Purchases and Accounts Payable

Paul M. Blissett Paul Blissett is a former civil servant with Public Works and Government Services Canada.Note

[This is the synopsis of a submission that won the Federal Government Category & Overall Grand Prize Winner in the 1996 Fraser Institute/Financial Post Economy in Government Competition.]

This paper deals with the reengineering of three major functions within the federal governments' financial cycle:

     1.     The purchasing function for goods and services.

     2.     The requisitioning and payment function for those goods and services.

     3.     The processing of General Accounts Payments (suppliers and other related accounts).

Currently all three functions are separate and distinct, largely paper driven, inefficient, and labour intensive. All of these processes consume a high level of resources both internal to client departments for which Public Works and Government Services Canada (PWGSC) provides payment services, and within PWGSC payment operations.

The purchasing process

The purchasing process within client departments is paper driven and labour intensive. Even though every purchase order or contract eventually leads to the issue of a payment for goods or services, the two processes are completely separate both functionally and in terms of processing.

The requisitioning and payment process

Of the approximately 198 million payments PWGSC issues on behalf of government client departments, approximately 8 million of these payments are for General Accounts Payments (payments to suppliers, grants and contributions, transfer payments, U.S. payments and other non socio-economic payments). Although these payments comprise only 4 percent of the total issue volume of the 198 million, the process consumes approximately 49 percent of the PWGSC production resources assigned to the payment process. The requisitioning process for these payments in the client offices is equally labour intensive.

General accounts payments

General Accounts Payments is the term used by PWGSC to describe the product and system which processes a wide variety of payments including payment for goods and services provided to the Government of Canada (suppliers accounts), grants and contributions, U.S. payments and other miscellaneous payment types. These payments are issued through the Accounting Data Input System (ADIS) which is an antiquated and cumbersome payment/accounting system that greatly contributes to the labour intensity and inefficiency of processing this payment product. Consequently, these payments cannot currently be processed through the recently developed Standard Payment System through which the remaining 190 million payments are scheduled to be issued.

The reengineered process

The reengineered process designed to address these problems modernizes the purchasing/ payment cycle in the Government of Canada. The revised system process is for the most part paperless, automated, on-line interactive, and integrated with the purchasing/payment functions of client departments and the supply and payment functions of Public Works and Government Services Canada.

As a result of this reengineered purchasing/ payment process we expect:

     •     Substantial savings in resources and operating costs government wide. If implemented on a government wide basis (130 government departments and agencies) it is not unreasonable to estimate person year savings in the thousands and cost savings in the million of dollars.

     •     Substantial efficiency gains within client departments and Public Works and Government Services Canada and improved and more flexible services provided to client departments.

     •     Client departments benefit as they will have more flexibility and a greater role in the purchasing/payment process.

     •     Considerable reduction in the time required to order and pay for goods and services. Improved payment time will reduce the interest costs that result from late payments.

     •     Improvement in the relationship between the government and the private sector allowing both the government and suppliers to operate with greater efficiency.

      •     A system that is portable to provincial and municipal levels of government and the private sector. This would facilitate the governments' strategy of privatization and contracting out of government functions.


The Divider Effect

John Robson

In a recent article in National Review, Raymond J. Keating of the Small Business Survival Coalition argues against government financing of sports stadia. He describes the arguments made in favour of it, and uses sound economic arguments to refute them. But in one case he doesn't go nearly far enough.

People only spend so much money on entertainment . . . and therefore new sports stadia and teams divert spending from one form of entertainment to another.

Among the typical arguments made in favour of such spending, he mentions one that just won't die, the Keynesian "multiplier effect." According to this Keynesian notion, a dollar of public expenditure provides more than a dollar's worth of economic benefit to the economy because when, for instance, a government spends money constructing a stadium, it pays wages and salaries to contractors and workers who in turn spend that money on food, clothing, shelter, entertainment and other products, thus passing it on to people in those fields who in turn spend it on other stuff. According to this line of reasoning, the net benefit to a community from such a project ends up being some multiple of the original cost, hence the name "multiplier."

Keating went on to argue that the multiplier did not operate in this case because of the "substitution effect." People only spend so much money on entertainment, he argues, and therefore new sports stadia and teams divert spending from one form of entertainment to another. See "Pitching Socialism," by Raymond J. Keating in National Review, April 22, 1996 pp. 38-42.Note Probably he is right about that. But that's not the point.

The point is, there is no net multiplier effect at all. So let me take stake in hand to try to pound it, once and for all, through the heart of this beguiling but dangerous idea. This is probably futile, because economic fallacies are more durable than Dracula in the old horror comics (in which, you may recall, no sooner does someone get him finally staked down than some dumb tourist comes wandering by, goes, "Gee, a skeleton with a stick in it," yanks out the stake and the bloodsucker comes lurching back to life). But here goes, anyway.

Keynes and his followers were correct in saying that when the government raises, say, a million bucks in taxes and builds something, the money does get spent a number of times within a year, and so the gross contribution to the GDP is greater than $1 million. But in taking the argument only this far they literally made a "gross" error: they looked at the gross and not the net impact of government spending.

. . . whoever the cash was taxed away from was also going to spend it on some- thing . . .

What they forgot in their analysis was that whoever the cash was taxed away from was also going to spend it on something, just like the person who received it from the state, and the person on whose services the taxpayer was going to spend it would also have spent it again, and so on and so on.

Therefore there is a "divider effect" that cancels out the "multiplier effect": when a dollar is spent by government, GDP is increased by a multiple of the original dollar, it is true, but when a dollar is taken in taxes, GDP is reduced by a multiple of that original dollar in the same way.

Sure, the construction worker on a government project buys a sandwich and gets his kids braces, and the sandwich shop guy and the orthodontist spend the money again. But the taxpayer now doesn't buy the sandwich or get the braces, his sandwich shop guy and his orthodontist don't then spend that money again, and it all cancels out.

Keynes' multiplier simply amounts to a mathematical incarnation of what Henry Hazlitt long ago identified as economic error number one: looking only at the short run and at the people immediately affected. And that, in turn, means that behind all the baffling equations the multiplier effect was just a more than usually sophisticated attempt to get something for nothing.

So there. It's finally dead. The stake has been rammed through its heart, and it's nothing but a pile of dry bones with a stick through it.

Keynes' multiplier simply amounts to a mathematical incarnation of what Henry Hazlitt long ago identified as economic error number one: looking only at the short run and at the people immediately affected.

Until the next dumb politician comes along.

Click here to view Cartoon

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.